Business Context and Reporting Period
Actuant Corporation, the registrant identified in the filing, is a global industrial manufacturer organized into Industrial Tools & Services (IT&S) and Engineered Components & Systems (EC&S). The report covers the three and six months ended February 28, 2019, representing fiscal second quarter and year-to-date fiscal 2019 results. The filing states that the company intended to focus on IT&S and pursue a potential divestiture of EC&S.
Key Financial Metrics
| Metric | Three months ended Feb. 28, 2019 | Prior year | Six months ended Feb. 28, 2019 | Prior year |
|---|---|---|---|---|
| Net sales | $271.9 million | $275.2 million | $564.4 million | $564.1 million |
| Gross profit | $97.5 million | $89.7 million | $202.5 million | $190.6 million |
| Gross margin | 35.9% | 32.6% | 35.9% | 33.8% |
| Operating profit | $16.4 million | $9.8 million | $7.0 million | $24.5 million |
| Operating margin | 6.0% | 3.6% | 1.2% | 4.3% |
| Net earnings (loss) | $2.8 million | $(18.2) million | $(14.7) million | $(13.0) million |
| Diluted EPS | $0.04 | $(0.30) | $(0.24) | $(0.22) |
- Segment performance: IT&S sales increased 9% in the quarter and 7% year to date, with operating margins of 17.8% and 17.7%, respectively. EC&S sales declined 11% in the quarter and 7% year to date; reported operating losses were $1.4 million and $29.7 million, including impairment and divestiture charges.
- Cash flow: Year-to-date operating cash flow was an outflow of $51.3 million versus an outflow of $22.1 million in the prior year. Capital expenditures were $15.7 million. Investing activities provided $20.5 million, primarily from business-sale proceeds, while financing activities used $50.4 million.
- Liquidity: Cash and equivalents were $170.4 million at February 28, 2019, including approximately $159 million held by foreign subsidiaries. The company had $298.8 million of unused revolver capacity.
- Debt: Total senior indebtedness was $487.6 million, including a $200.0 million term loan and $287.6 million of 5.625% senior notes. The company repaid $47.5 million of term-loan principal during the six months and was in compliance with debt covenants.
- Balance sheet: Total assets were $1.403 billion and shareholders’ equity was $585.6 million. Net primary working capital increased to $250 million, or 23% of sales, from $213 million, or 18%, at August 31, 2018.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 1%, but core sales increased 7% after adjusting for unfavorable foreign-exchange effects and a net reduction from acquisitions and divestitures. Year-to-date core sales increased 4%.
- Gross margin improved due to favorable mix, pricing net of tariff and commodity cost increases, the absence of prior-year heavy-lifting cost overruns, and restructuring benefits.
- Second-quarter earnings improved from a prior-year loss, but year-to-date results remained a loss because fiscal 2019 included $43.3 million of impairment and divestiture charges, compared with $3.0 million in the prior year.
- IT&S benefited from strong Service & Rental demand, which increased core sales 43% in the quarter and 28% year to date. EC&S faced weaker On-Highway demand and divestiture-related sales reductions.
- The company completed sales of Cortland Fibron and Precision Hayes and classified Cortland U.S. assets and liabilities as held for sale. It announced an intention to potentially divest the remaining EC&S segment.
- Effective September 1, 2018, the company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $0.1 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2019 consolidated core-sales growth of 3% to 5%, compared with 6% in fiscal 2018. IT&S guidance was 3% to 5% core growth and EC&S guidance was 2% to 5% core growth.
- Management expected continued, but moderated, growth in industrial, mining, infrastructure, commercial vehicle, off-highway and agriculture markets, with stabilization in oil and gas and energy maintenance spending.
- On March 21, 2019, the company announced a restructuring plan targeting $12 million to $15 million of annual savings, estimated costs of $15 million to $20 million, and completion within 18 to 24 months.
- On March 29, 2019, the company refinanced its credit facility with a $600 million facility consisting of a $400 million revolver and $200 million term loan, maturing in March 2024. The new facility increased revolver capacity and included improved liquidity provisions.
- Fiscal 2019 impairment and divestiture charges included a $13.7 million goodwill impairment, write-downs of businesses held for sale, and other divestiture costs. Further write-downs may occur if sale proceeds or disposal-group assumptions change.
- The company disclosed ongoing U.S. and European sanctions reviews relating to certain sales involving Iran and potential diversion of products to Crimea. The timing and potential penalties were not estimable, although management did not expect a material adverse effect.
- Key risks include foreign-currency volatility, tariffs and commodity costs, end-market weakness, execution of divestitures and restructuring, goodwill and intangible-asset impairment, debt covenant compliance, cybersecurity, supplier concentration, litigation and product liability.
Important Facts for Investors to Verify
- Confirm the status, timing, proceeds and final charges associated with the planned EC&S divestiture and the Cortland U.S. sale.
- Assess whether the announced restructuring achieves the projected $12 million to $15 million of annual savings and monitor the related $15 million to $20 million cost.
- Reconcile weak year-to-date operating cash flow and elevated working capital with management’s liquidity assessment and debt repayment plans.
- Evaluate the impact of foreign-currency movements, tariffs, commodity prices and demand trends on IT&S and EC&S margins.
- Monitor additional goodwill, intangible-asset or held-for-sale impairment charges and any potential outcomes from the OFAC and Netherlands sanctions reviews.
- Verify execution of the March 29, 2019 refinancing and the company’s ability to meet future maturities and financial covenants.